Rep. Lloyd Doggett, D-Texas, and Sen. Sheldon Whitehouse, D-R.I., have introduced legislation to discourage the use of corporate tax havens.
The Stop Tax Haven Abuse Act, backed by more than 50 other lawmakers, along with the Corporate EXIT Fairness Act, would curb some tax strategies such as deferral and "check the box" that encourage companies to shift jobs and profits to foreign countries. The legislation also aims to curtail corporate tax inversions.
The Stop Tax Haven Abuse Act would eliminate tax incentives for U.S. companies to shift jobs and operations offshore, ending tax strategies that enable large multinationals to avoid taxes by shifting profits to offshore tax havens. Under current law, a company can elect to defer paying taxes on profits, while deducting the expenses incurred to produce the profits. The bill would require companies to delay taking deductions until they pay taxes on the related profits.
The bill would also end the ability of companies to simply “check the box” on a tax form to say some of their foreign subsidiaries don’t exist for tax purposes. The bill would also make it easier for the IRS to get the names of owners of foreign bank accounts, and increase penalties for corporate insiders who fail to disclose their offshore activity. The bill would discourage U.S. companies from incorporating abroad by deeming corporations worth $50 million or more that are managed and controlled in the U.S. to be U.S. taxpayers. The Joint Committee on Taxation estimates this bill would save tens of billions of dollars over the next decade.
The Corporate EXIT Fairness Act would tighten rules and take away tax incentives for corporate inversions. The bill would apply an exit tax to any U.S. company changing to foreign control, preventing the new foreign company from accessing tax-free cash of U.S. subsidiary. It would impose an exit tax as the greater of two calculations: either the tax owed on accumulated deferred foreign income of the U.S. controlled foreign corporation, or the tax on the appreciation in value of the U.S. controlled foreign corporation.
“Americans citizens who renounce their citizenship must pay an exit tax,” Doggett said in a statement. “American corporations should too. Corporations that renounce their citizenship not only invert their business operations, they pervert our tax laws. And, instead of rewarding multinationals that revel in single digit effective tax rates, I propose to shut the door on loopholes they exploit, leveling the playing field for small businesses.”
The bill would also tighten restrictions on corporate inversions, increasing the threshold of foreign ownership required to accomplish the inversion for tax purposes, while imposing an independent management-and-control test that might prevent other attempted inversions. If a company does not accomplish its tax-avoiding inversion aim under the tighter threshold levels set by the bill, then it would continue to be taxed as a U.S. company.
“Hard working Rhode Islanders can’t use tax havens to avoid paying their taxes,” said Whitehouse in a statement. “Corporations and hedge fund managers shouldn’t be able to either. This bill would make the tax code fairer for American companies that play by the rules.”
Similar legislation has been introduced by Democrats in previous congressional terms, particularly by former Sen. Carl Levin of MIchigan, but has not advanced far in the Republican-controlled Congress of recent years. However, with Congress now getting ready for a comprehensive tax reform overhaul, Democrats are re-introducing some of their past proposals.
Both bills have been endorsed by the Financial Accountability and Corporate Transparency (FACT) Coalition, Americans for Tax Fairness, Fair Share, the Institute on Taxation and Economic Policy, the Main Street Alliance, Oxfam America, Public Citizen, U.S. PIRG, and American Sustainable Business Council.
A recent U.S. PIRG report found that at least 73 percent of Fortune 500 companies operate subsidiaries in offshore tax havens. “Taxpayers and small businesses shouldn’t have to pick up the tab for companies that hide their income in offshore destinations,” said U.S. PIRG tax and budget associate Allie Robins in a statement. “When companies rely on our workforce, our infrastructure, and our robust markets to earn their profits, they shouldn’t then play games and use gimmicks to avoid their taxes.”
Other groups also offered praise for the bill. “The Stop Tax Haven Abuse Act and the Corporate EXIT Fairness Act offer the type of tax reform we need—they would close unfair tax loopholes that allow multinational companies to offshore profits and escape responsibility for paying their fair share,” said FACT Coalition deputy director Clark Gascoigne in a statement. “Tax haven abuse now costs American taxpayers up to $180 billion per year. When multinational companies and wealthy individuals abuse tax havens, it’s domestic businesses and middle-class Americans who get left picking up the tab. The reforms in these bills could and should garner bipartisan support, while offering more sensible and popular reforms than the radical alternatives that are dividing the Congress, including the border adjustment tax.”
Eric LeCompte, executive director of Jubilee USA Network, a religious development organization, said in a statement, “Governments around the world need greater revenues to meet their budgets. Congress needs to pass legislation that closes loopholes. This legislation helps shine a spotlight on the problem of tax havens. It helps track where companies are paying or not paying taxes. Tax avoidance, evasion and corruption are too often thefts from the poor and we have a moral imperative to act.”
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